In 1980, Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA), 26 USCS 1445. The law stipulates that if the seller of real property is a “foreigner”, the buyer must withhold tax of 10% of the gross purchase price. , unless exceptions apply by law.
“Foreigner” means a foreigner who is not a resident, a foreign company not treated as a domestic company, or a foreign partnership, trust or estate. Foreigners who stay are not considered foreigners according to the law.
Exceptions for FIRPTA
There are a number of exceptions to FIRPTA. A transaction is excluded if:
- real property seller provides a non-foreign statement stating under perjury that the seller is not a foreigner
- the transaction involves the transfer of the acquired property for use as the buyer’s residence and the realized amount is not greater than $300,000
- the seller obtains a “qualified statement” from the Internal Revenue Service stating that no withholding is required
Getting Legal Counsel
With respect to real estate sales involving foreign investors, buyers and sellers should consider entering into specific agreements regarding FIRPTA compliance. The expertise of a real estate attorney can help to avoid complications that may arise at the last minute and delay closing. As always, when dealing with the Internal Revenue Service, it’s important to proceed with extreme caution, because “an ounce of prevention is worth a pound of cure.”